Question

How do the capital requirements vary by the stage a business is in its lifecycle? Which sources of funding are most appropriate for each stage? Explain your reasoning.

Answer 1

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here I am going to describe how does the capital requirement to vary by the stage of a business and its life cycle along with which sources of funding are most appropriate for each of the stages.

Just like a kid grow the business grows with every step. There are various stages of a business in its whole life cycle and those various stages require different capital requirements and for those capital requirements, there are various sources of funding suitable for each of the stages.

the first stage of business is also called the seed capital stage where the product is just launched in the market and product needs hi marketing promotion skills to get stable into the market and for this, there is a lot of requirement of money for the promotion and the marketing strategies for the launch of the product. this requires a lot of money and the best funding method for this stage would be the loan in exchange for common stock.

the second stage start where the product starts to get a little profit and revenue from its sales. The money required for the capital requirement is comparatively less than the first stage and the best funding method for the second stage would be Angel investors as the Angel investors are the part of a family of the friends. That money can be converted into preferred stock later.

the third stage of business is when the business is upon the growth and is earning a lot of profit and revenue in the states there is no need of much of the funding, therefore, business is earning a lot of profit in this stage.

The fourth stage comes when the sales of the product of the business are slightly declining and businesses require more money to get the product stable in the market back. For this, a lot of money is required and the best funding source for this change would be the investors who can invest in the company so that the product would get enough of the funding to be back stable in the market.